Forget interest rate cut, Crisil sees higher bad loans for banks

India Inc., forever hopeful of a softening of interest rates in future, is interpreting the Reserve Bank of India’s (RBI) as a softening of its monetary policy stance. In its first quarter review of Annual Policy for 2013-14, RBI maintained status quo on rates but was less hawkish than what it projected a day earlier in its macro review.

However, ratings and analytics major CRISIL sees very little chance of any easing of rates in the near future, even if RBI’s liquidity tightening measures of July are rolled back in the coming days. CRISIL has also forecast higher non-performing asset (NPA) levels for banks by March 2014, driven by a weakening of credit quality thanks to slow GDP growth, heightened currency volatility and higher than expected rates.

CII president Kris Gopalakrishnan said Corporate India “drew heart” from the RBI statement that had it not been for the rupee volatility, rates could have been reduced, since inflation had started to moderate. “We understand the decision of RBI on the rates,” Gopalakrishnan said. But CRISIL’s analysis is quite different and rules out any lowering of rates in the medium term. In fact, the agency believes there is a “significantly diminished” probability of a repo rate cut during the rest of 2013-14. Consequently, lending rates are less likely to decline and would remain elevated for the remainder of the year. This, CRISIL says, would be true even if RBI rolled back its liquidity tightening steps.

Monetary policy is unlikely to bolster growth this year, it says, adding that keeping this in mind, its growth estimate for 2013-14 has been pared to 5.5 percent from 6 percent earlier. Its average headline inflation forecast remains unchanged at 5.3 percent.

While the timing of when RBI could be in a position to roll back the liquidity tightening measures - seen as an effective rate hike by financial and corporate circles - is also unclear, the rating agency says, but adds that though the rupee has become more stable of late after the RBI measures, it could see higher volatility when the measures are reversed. More so, if the US Fed begins winding down its quantitative easing (QE) program towards the end of the year. This possibility has been highlighted by RBI too in its first quarter Policy review.

Rise in bad loans

A worrisome fact is CRISIL’s forecast that bad loans of banks will likely increase in the coming days. Gross NPAs in the banking system are forecast to hit the 4 percent level by March 2014, against 3.3 per cent in March 2013. Worse, rising delinquencies and higher cost of short-term funds would add to the woes of banks which would put pressure on the net interest margins (NIMs) of banks, specially the public sector ones. Average NIMs would likely decline 15-20 bps during 2013-14, CRISIL says.

Loan offtake would also turn sluggish and a 15-16 percent growth in bank credit is being seen by the agency in 2013-14, roughly the same level as that in the previous fiscal. With little possibility of lowering bank deposit rates, these on the other hand may grow a shade higher than last fiscal, at 14-15 percent this year.

Not surprisingly, India Inc has pushed for getting stalled projects restarted on a ‘mission mode’. CII, for instance, has suggested that the top 100 projects in the country need time-bound and transparent clearances.

But for now, given the reluctance of the central bank to take its eyes off the rupee, a lending rates-driven push for growth seems a remote possibility.

Corporate India appears unrealistically hopeful at this point.